Author(s): Evor#7999

Editor(s): FINE#8385

Last updated: 18th Dec 2022

What are Flashbots?

Flashbots is a company that links mining pools with searchers. Instead of using private contracts and agreements, it is an open participation system, that any searcher and mining pool can participate.

Miner Extractable Value (MEV)

What is MEV?
MEV refers to the maximum amount of income that may be derived from block creation. 

A block runs the risk of being exploited and centralized if the amount of MEV it contains is greater than the amount of standard block rewards. If this happens, validators may decide to rearrange the blocks in order to keep the value of the income produced by MEV for themselves. To make this simple to understand, it is easily the profit a miner can gain by arbitrarily including, excluding, or reorganizing transactions in the blocks they create. 

The major scope of Flashbots is to make the MEV extraction environment permissible, open, and balanced. It aims to democratize access to MEV revenue, increase the transparency of MEV activity, and redistribute MEV revenue.

The value of MEV has increased along with the popularity of Defi on Ethereum, which has resulted in a severely diminished user experience and "unfair markets." There doesn't seem to be anything that can be done to address this element of the issue, according to the consensus position in Ethereum. This is thought to be an inevitable result of decentralized systems, and users must accept it or change their behavior if they don't like it.

How do you use Flashbots? 

Here’s how Flashbots function. If a blockchain is hosting complicated activities, such as betting, decentralized exchanges, or liquidation procedures, parties can profit more by making use of these chances. There may be arbitrage opportunities, for instance, if a user places a market buy order to a decentralized exchange to purchase a token. The first entity that matches this order may be rewarded significantly. Similar to front running in conventional finance, this idea. The next block's producer may decide who can take advantage of this chance in blockchain systems, and as a result, this privilege could result in additional cash incentives for the block producer.

In order to identify MEV opportunities, searchers examine the blockchain and memory pool. They establish a transaction—or a collection of transactions—that takes advantage of the opportunity when they see it. The central Flashbots server is then contacted to process these transactions. 

For privacy, to prevent these transaction bundles from ever reaching the public memory pool, the Flashbots server sends them on to the miners. If there are any conflicting transactions, the miners choose the one that pays them the most before creating their block candidates.

The basic theory behind this is that a searcher will stop bothering to broadcast their MEV transactions to the memory pool and will instead solely use the Flashbots system.

Flashbots; Adoption and Gas Prices

Looking at how gas fees as ETH reaches new highs and the larger DeFi market expands, average gas prices have remained high. Flashbots addresses this problem by combining a modified fork of the Ethereum Geth client, MEV-Geth, and a transaction bundle relayer, MEV-Relay, to enable traders or "searchers" to send Flashbots transaction "bundle" requests to approved miners, along with a sealed tip. MEV-Geth chooses the most profitable bundles, and when one of these bundles is included in a block, the miner receives the searcher's tip.

There are no gas fees for failed transactions because everything is done outside of the Ethereum mainnet. Furthermore, MEV strategies benefit both traders and miners without clogging up the system for everyone else.

To be sure, Flashbots aren't the only reason for the lower gas prices. Nonetheless, the lower fees have typically correlated with an increase in the percentage of blocks with at least one no-gas fee payment as a result of Flashbots.

Are Flashbots Relay Entities Centralized?

The entirety of Flashbots is centralized. Although it seems that this funding may be charitable, there is not much to be worried about, it is provided by Fred Ehrsam's cryptocurrency venture capital business Paradigm. 

There are c95% of miners subscribing to the service, Flashbots is centralized and a part of the block production process in Ethereum. However, strictly speaking, it is not a compulsory step in the block production procedure. No hash power is owned directly by the centralized Flashbots relay organization. Flashbots are also unable to restrict transactions unrelated to MEV. Transactions that were not relayed by Flashbots are nonetheless admissible by miners. The alternative feels far worse than Flashbots, which is obviously a centralizing force.

Additionally, the MEV transaction bundles' data must be handled by the Flashbots entity with care and security. Flashbots may outbid and out-search other searchers if it acted maliciously. Flashbots is therefore not the best long-term answer to the MEV problem because it is a trusted and centralized system. 

They can claim that it is only adding layers and complexity to hide the centralization so that it is difficult to detect, but there is a small benefit in adding additional layers, though. As a result, the centralization may be more difficult to detect, which may enhance the network's resilience against certain adversaries over time. At the same time, centralization may be moved more readily among the layers, confusing any attacker.

Hence, before submitting MEV transactions, searchers must first authenticate themselves, and they can earn reputations in order to reduce spam.

What does it cost?

A typical transaction uses a different fee system than a Flashbot transaction, which pays rewards to miners. Since the commission is incorporated in the Ether value, there will never be a transaction charge for a Flashbot transaction. So it costs absolutely nothing to use.

Flashbots And ETH 2.0/PoS

The Ethereum proof-of-work (PoW) mining mechanism has been merged with the Flashbots system. The adoption of Flashbots has been reset to zero once more as a result of the Merge and the cessation of PoW mining. A new Flashbots infrastructure has been developed and staking agents must accept this new method in order to combat the MEV issue. This was not included in the roadmap for ETH 2.0 and could present another challenge when moving to ETH 2.0. 

In order to level the MEV playing field on Proof-of-Work (PoW) Ethereum (eth1), Flashbots has been instrumental. It now seeks to bring the same advantages to Proof-of-Stake (PoS) Ethereum (eth2). Both block producers and MEV searchers are involved in the deployment of Flashbots. Flashbots are used by over 90% of miners in Ethereum, however as eth2 and the switch to PoS approach, adoption will return to zero. Therefore, it is crucial that validators embrace an MEV solution for Ethereum post-merge in order to maintain the sustainability of the Ethereum ecosystem.

Flashbots Eth2 Working Group will help with this adoption. Members of the Flashbots ETH 2 Working Group are ecosystem contributors who intend to use Flashbots on Ethereum after the merge. They are dedicated to ensuring that the system complies with the Ethereum principles by offering technical input, helping with the development, and thoroughly testing the system. The founding members of the Working Group include; Flashbots, Alchemy, Ankr, Bison Trails, Bitcoin, Suisse, Blockdaemon, bloXroute, Certus One, Ethermine, EthStaker Community and so on.

This essential piece of technology represents a substantial advancement in Ethereum's MEV mitigation efforts. A significant step toward the mass adoption of this technology is to make Flashbots as accessible as possible to both developers and end users. 

Benefits of Flashbots 

What advantages do you have while using Flashbots?
You may avoid hungry sandwich bots after utilizing the software from Flashbots to send your transaction straight to the miners. 

Sending transactions with Flashbots has the following advantages for users: 

• Defense against front-running attacks: By sending transactions directly to miners, sandwich bots in the mempool cannot front-run you. 

• No fees for unsuccessful transactions: If your trade will reverse, miners won't add it to the chain. 

• Inclusion at the top of blocks: Transactions sent through Flashbots are given priority and inclusion at the top of blocks.

• Simplified execution: We vague away the problem of making, signing, and submitting bundles 

• High reputation: The Flashbots Protect API's backend service has successfully processed hundreds of transactions, so the signing key has a strong reputation. 

• Simulation: To ensure a high delivery rate and optimize reputation, internal simulation is performed before submission to Flashbots.

The value of extracted MEV to Ethereum fees can be used as another metric to assess the economic significance of Flashbots. Data from Coinmetrics show that the cumulative Ethereum miner fees over the past 12 months have been close to US$10,740. In comparison, the value of MEV extracted at that time, according to explore.flashbots.net, was US$393M. One could argue that Flashbots is not extremely economically relevant because this is merely a share of 3.7%. However, the 3.7% of revenue might have a significant impact on miner profits, and the 90% adoption rate by miners suggests that it is a crucial component of the Ethereum network. Flashbots are essential to us because transaction propagation is expected to continue to be a big element of them in the future.

This essential piece of technology represents a substantial advancement in Ethereum's MEV mitigation efforts. A significant step toward the mass adoption of this technology is to make Flashbots as accessible as possible to both developers and end users. 

How To Operate

1. Add the Flashbots Protect RPC (https://rpc.flashbots.net) to your Wallet (Click here for the full guide on how to add the RPC to Metamask)

2. Trade as usual on your preferred DEX (Uniswap, Sushiswap and others), or submit any other type of transaction

3. Once you execute the transaction it will be sent to the Flashbots Protect RPC endpoint

4. The Flashbots Protect RPC endpoint validates your transaction and forwards it to the Flashbots Protect API

5. Each block the Flashbots Protect API sends your transaction to the Flashbots network, where it is sent directly to miners.

6. After your transaction is included on-chain then it will show as a success as it does usually on your DEX and Wallet**
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